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The Time Has Come To Look at Combined Heat and Power Stocks

Reading about Ron Muhlenkamp’s thoughts on natural gas should have investors pondering what other industries could benefit from the shale boom in the United States and the constant evolution of technologies. Muhlenkamp succinctly hit plenty of nails right on the head in explaining his investment strategies in the space.

It also sparked thoughts of how natural gas could play a bigger role in power generation in residential, commercial and industrial applications.

The nation’s existing power grid is tired, old and expensive. As Brad Plumer pointed out in a Washington Post article last year, building and maintaining local power grids is costing Americans considerable more in the last decade. Further, outage frequencies and durations are growing. Just ask the millions of American and Canadian residents and companies that lost power in the wake of an ice storm that swept across the middle of North America last month, leaving many with out power for more than a week in freezing temperatures at Christmas.

Aside from arguments for or against the integration of smart grid technologies and the associated costs versus benefits, the fact is that the electricity grid is necessary. Upgrades are going to take hundreds of billions of dollars and years to complete, but the nation should be left with a grid that is much “wiser” and able to “heal itself” when all is said and done.

But What’s The Solution For Problems Today?

The most common answer is a back-up generator for a power outage. Gasoline and diesel generators require regular maintenance to ensure that they work properly at the time of necessity. As U.S. Environmental Protection Agency notes on its website, “even these measures are not foolproof, as shown during the Northeast black-out of 2003, when half of New York City's 58 hospitals suffered failures in their backup power generators.”

To many, a natural gas generator offers a better solution. A couple household names in that business are Generac (GNRC) and Cummins (CMI) , companies that can fill needs from residential to industrial in scale. There are also options that can provide a savings to companies by having generators at their facilities, called Utility Demand Management programs. Titan Energy Worldwide (TEWI) , who is partnered with Generac as an industrial dealer, offers “SmartPower,” a program where businesses agree to switch off power from the utility provider and run on their generator during times of peak energy demand in return for guaranteed savings on their energy bill.

Combined Heat and Power: Today’s Best Answer

Combined heat and power (CHP), or cogeneration as it is also called, is the simultaneous generation of multiple forms of energy from one source fuel in a single system. Most of the time, the two forms of energy are electricity and thermal energy. In layman’s terms, the system works by capturing waste heat that is created while generating electricity and then repurposing it for other applications, such as hot water, hot air, steam, or chilled water for process cooling.

Source fuels for CHP can be very diverse, including, but not limited to, biofuels, fuel cells, coal, oil and natural gas. Given the natural gas revolution in the States resulting from horizontal drilling in shale basins, interest is growing quickly around CHP systems as an efficient and cost-effective solution. Running on natural gas or a different source fuel, the units by definition serve as back-up generators in the event of a power failure. In many cases, facilities are still connected to the grid and if an outage does happen, the CHP systems can be programmed to ratchet-up power to fill a supply void.

The existing U.S. power grid runs at roughly 33% efficiency, meaning that it discharges about twice as much heat as electrical energy that makes it to the consumer. This inefficiency equates to the U.S. wasting more heat energy every year than the total energy consumption for all of Japan. In comparison, cogeneration systems are about 80-90 percent efficient.

Further, CHP slashes carbon dioxide and greenhouse gas emissions. According to the International Energy Agency, cogeneration systems in the U.S. reduce CO2 emissions by 400 million metric tons annually. In the European Union, where CHP now accounts for more than 11 percent of electricity capacity, greenhouse gas emissions are estimated to have been reduced by 15 percent between 1990 and 2005 as CHP systems became more frequently used.

CHP is getting government support at all levels globally, providing incentives for adoption, if not flat-out mandating changes that prod companies to embrace CHP. At the G8 Summit in Heiligendamm, Germany in 2008, world leaders “called on countries to adopt instruments and measures to significantly increase the share of combined heat and power in the generation of electricity,” according to a report by the International Energy Agency.

The U.S. currently has about 82 gigawatts of CHP spread across more than 4,100 commercial and industrial facilities. The General Services Administration and the National Institute of Health are already running CHP facilities and the U.S. Capitol and congressional buildings are being outfitting with an 18-megawatt CHP plant. In 2012, President Barack Obama signed an executive order for the country to increase from 82 gigawatts of CHP to 122 gigawatts by 2020. The additional systems are expected to reduce CO2 emissions by 150 million metric tons (about 25 million cars worth) and spark up to $80 billion in new capital investment.

So Which Companies Are Leading the CHP Pack?

General Electric (GE)

There are a number of big names in the business and some smaller ones to consider as well. General Electric (GE) has established a presence with it Jenbacher gas engines as the prime movers in its CHP systems. GE’s systems can not only capture and reuse waste heat for all available applications, but also take the carbon dioxide that is released by the gas engine exhaust and use it for fertilization in greenhouses, a trend that is starting to get its legs under it. GE has completed large projects in many countries, including system installations for the London Olympics in 2012 and hospitals in the United Kingdom. GE said this week that it is supplying a 9F gas turbine and services agreement for a massive natural gas-fueled combined cooling, heat and power (CCHP) in Germany.

Caterpillar (CAT)

Caterpillar (CAT) also has a solid position on the mechanical side of CHP. Solar Turbines, a Cat company, sells a line of turbines used in CHP. Cornell University’s $82 million investment to upgrade its power plant in 2008 utilizes two 15-megawatt Solar Titan natural gas combustion turbines in combination with Rentech (NASDAQ: RTK) heat recovery steam generators. By switching to CHP, to school eliminated burning 60,000 tons of coal each year.

Siemens AG (SI)

Siemens AG (SI) has its Siemens Energy arm, which delivers a wide array of CHP products, ranging from gas turbines to complete turnkey solutions. The company is in the process of building a large combined heat and power plant in Gorzów Wielkopolski, Poland for energy utility PGE GiEK SA. The plant is designed to have an electric capacity of 138 megawatts and a thermal capacity of 90 megawatts. Commissioning is scheduled for 2016. Including a long-term service agreement for the main components, the contract is valued at about 160 million euro (US$218.9 million). The plant will be fired with nitrogen-rich natural gas.

Capstone Turbine Corp. (CPST)

On the smaller scale, Capstone Turbine Corp. (CPST) has shipped more than 7,000 microturbine systems globally, with about 40% of those systems used in CHP applications. The company leaves the huge projects to companies like GE and Siemens, remaining focused on projects in the 30 kilowatt to 10 megawatt range. Its latest news from the industry was earlier this month, announcing a contract for its C1000 dual mode propane high humidity microturbine for use in a CCHP system at a Hawaiian resort. Micro-CHP is considered by many still to be an emerging field, but it has tremendous potential to serve some great needs in small applications.

American DG Energy (ADGE)

American DG Energy (ADGE) is taking a different approach by not selling equipment, but rather the energy provided by their CHP systems. The strategy is working as the company is stamping a footprint in the United States in Europe by allowing customers to employ the system with no capital expenditures. American DG designs a CHP system tailored to the client’s needs, supplies, installs and maintains the system and generates revenue through a long-term contract for the energy produced. The company guarantees the energy consumed to be priced at a discount to the client’s current price of electric. American DG already operates about 110 systems, with clients including the likes of DoubleTree by Hilton and Sunstable Leisure Centre in the United Kingdom. The company announced on Thursday a new contract valued at $1.3 million in 2014 to install and maintain a CHP system as well as manage an energy plant conversion at the DoubleTree Suites in Time NYC’s Times Square.

Green Infrastructure That's Worth Green

In a period where companies are more economically and ecologically aware than probably ever before, CHP is a compelling industry that doesn’t catch a lot of media airtime for whatever the reason. The technology provides facilities with the opportunity to upgrade vintage power and steam heat systems and largely disconnect from the grid, while cutting costs and emissions at the same time. Low source fuel prices alone are likely not enough to send CHP use rocketing across the country, but in combination with government initiatives and the ongoing evolution to switch to greener technologies, the future looks bright for CHP.

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